Saturday, February 28, 2015

I was in the middle of preparing a post on how early corporate charters included provisions to ensure that corporations would serve the general welfare, but had to deal with a grave medical issue. My doctor sent me to the ER, and for over a week following, I found I was sleeping 12 to 14 hours a day, with little energy to do much else than watch the boob tube. I had intended to return to my post on early corporate charters, but listening to the news yesterday morning on the way to pick up a prescription, decided instead to post one long excerpt from a 1912 dissertation on railroad legislation in Minnesota.

Railroads, of course, had been constructed in the United States decades before the Civil War. So had some telegraphs. But they were not fully developed into an integrated national system until after the Civil War. There were three problems. Remember, our purpose here is to examine the history of USA economic development, to identify and adduce the proper principles of political economy for a republic. The United States was established as a republic at a point in world history where all other countries were ruled by monarchs and oligarchs. What sets the USA apart as a republic, so far as political economy is concerned, is the Constitutional mandate to promote the general welfare.

What I want to focus on here is the Dartmouth College case of 1819, which unfortunately, as time passed, became a shield behind which corporations tried to escape the regulatory will and intent of state and national governments. But as corporations became ever more powerful, and their activities affected the lives rapidly increasing numbers of people, the first stage of the populist uprising of the late 1800s emerged. This was the National Grange of the Patrons of Husbandry (The Grange), which was formed in the summer of 1867 and grew steadily until the financial crash of May 1873. As the resulting economic depression wore on, The Grange was surpassed in membership, political activity. and radicalism, by the Farmers Alliances, which had adopted the much more thorough Greenback critique of American capitalism. But it was the members of The Grange that first pushed through significant legislative regulation of corporations in the1870s. These became known as the Granger laws.

One of the principal grievances The Grange, and farmers more generally had, was the railroad companies' practice of giving preferential freight rates and storage rates to larger customers. This is not quite the exact same issue of rate differentials involved in today's debate over net neutrality (in which the internet carriers argue that they should be able to charge more for faster service, thus getting larger data users to pay more for improving and upgrading internet infrastructure), but it is remarkably similar. More important are the principles of political economy that we can adduce from the significant court decisions that resulted when corporations affected by the Granger laws attempted to have those laws declared unconstitutional under the legal precedent of the Dartmouth College case. The most important case was Munn v. Illinois, 94 U.S. 113 (1876). Before we return to the historical narrative, I think an excerpt from the summary of the case will show why it is so important.

1. Under the powers inherent in every
sovereignty, a government may regulate the conduct of its citizens
toward each other, and, when necessary for the public good, the manner
in which each shall use his own property.

2. It has, in the
exercise of these powers, been customary in England from time
immemorial, and in this country from its first colonization, to regulate
ferries, common carriers, hackmen, bakers, millers, wharfingers,
innkeepers, &c., and, in so doing, to fix a maximum of charge to be
made for services rendered, accommodations furnished, and articles sold.

3. Down to the time of the adoption of the
fourteenth amendment of the Constitution of the United States, it was
not supposed that statutes regulating the use, or even the price of the
use, of private property necessarily deprived an owner of his property
without due process of law....

4. When the owner of property devotes it to a
use in which the public has an interest, he in effect grants to the
public an interest in such use, and must, to the extent of that
interest, submit to be controlled by the public, for the common good, as
long as he maintains the use. He may withdraw his grant by
discontinuing the use....

These republican principals elaborated by the Supreme Court in Munn v. Illinois are, of course, completely at odds with the conservative and libertarian renderings of American economic history, which have been carefully rewritten and misinterpreted to present a view of untrammeled property rights. And I write "carefully rewritten and misinterpret" deliberately, having in view the thousands of shills and propagandists at places such as Club for Growth, American Enterprise Institute, Reason magazine, and the Cato Institute, maintained and funded by the Koch brothers and other conservative and libertarian enemies of the republic.

To return to our historical narrative, here is an extended excerpt from Railroad Legislation in Minnesota, 1849 to 1875, by Rasmus S. Saby, published by the Minnesota Historical Society, in Volume XV of its Historical Collections. The Volkszeitung Company, Saint Paul, Minn. May, 1912.

P 177
Whenever attempts were made to subject the railroads to regulation in the interest of the people, they sought refuge behind the Dartmouth College decision. In this case the United States supreme court had held that the original charter of Dartmouth College constituted a contract between the Crown and the trustees of the college, which was not dissolved by the Revolution, and that an act passed by the state legislature of New Hampshire altering this charter without the consent of the corporation impaired the obligation of the contract and was therefore null and void. (n789) All rights once legally vested in corporations were thus placed beyond the reach of subsequent state legislation. “This decision,” said Chancellor Kent approvingly, “did more than any other single act proceeding from the authority of the United States to throw an impregnable barrier around all rights and franchises derived from the government; to give solidity and inviolability to the literary, charitable, religious, and commercial interests of the country.” (n790) This statement, made in 1826, seems almost prophetic in the light of later developments. The growth of corporate enterprise and the part this decision was to play could not be foreseen, even by such far-sighted men as Marshall and Kent. The doctrine laid down in this decision was followed in later cases in federal and state courts, and it soon came to be regarded as a settled principle of American constitutional law that charters of private corporations were inviolable contracts between the legislature and the corporators, and that the subsequent power of the legislature was restrained by their terms. (n791)

…. different states began almost immediately to guard against the interpretation of future charters as inviolable contracts by expressly reserving to the state legislature the right to alter, amend, or repeal acts incorporating private corporations. (n793) …A third plan was to insert this reservation of power in the state constitution. Beginning with the Delaware constitution as amended by a constitutional convention in 1831, we find that by 1866 this provision is to be found in the constitution of at least fifteen different states. (n796)

From the great amount of legislation and constitutional enactment which it provoked, it is evident that the doctrine promulgated in the Dartmouth College decision was regarded as new and not altogether acceptable by the different states. And as time went on and railroads were built and railroad corporations grew in power, the situation became more and more serious; for the new corporations, though controlling an essential factor in the economic life of the country, claimed exemption from state regulation in the interests of the public they were serving as common carriers, because their charter rights were constitutionally beyond legislative interference….

P179
….The right of the legislature to control its own creatures, the corporations, was at the time of the granger movement no longer an academic question of political and legal theory; it was a vital question in the economic life of the country, and it had to be faced squarely. Thomas M. Cooley, the eminent jurist, expressed his opinion of the situation in 1873 as follows: “It is under the protection of the decision in the Dartmouth College case that the most enormous and threatening powers in our country have been created; some of the great and wealthy corporations actually having greater influence in the country at large, and upon the legislation of the country, than the States to which they owe their corporate existence. Every privilege granted or right conferred—no matter by what means or on what pretence—being made inviolable by the Constitution [according to this doctrine], the government is frequently found stripped of its authority in very important particulars by unwise, careless, or corrupt legislation; and a clause of the Federal Constitution, whose purpose was to preclude the repudiation of debts and just contracts, protects and perpetuates the evil.” (n799)

In an address in 1873 James A. Garfield criticised the judicial application of the Dartmouth College case, and ventured the opinion that some feature of that opinion as applied to the railway and similar corporations must give way under the new elements which time had added to the problem, and said further: “It will be a disgrace to our age and to us if we do not discover some method by which the public functions of these organizations may be brought into full subordination, and that too without violence and without unjust interference with the rights of private individuals.” (n800 James A. Garfield, "The Future of the Republic: Its Dangers and its Hopes," 5 Legal Gazette Phila 408 9, Dec. 19, 1873)

P180
Railroads had from their first appearance been considered common carriers, both in England and in the United States; (n801) and this being the case, many failed to see why railroads should not like other common carriers be subject to legislative regulation. That railroads, though constructed by private corporations and owned by them, were public highways, had been the doctrine of nearly all the courts since the earliest days of railroad construction. (n802) Because they were public highways for the public benefit, the right of eminent domain had always been given to them; (n803) and courts had frequently held that the public had an interest in such roads, whether they were owned and operated by a private corporation or not. (n804) Because railroads performed public duties and functions and were indispensable to the public interests, the state legislature could rightfully tax or authorize taxation for the purpose of aiding railroads. (n805) The United States supreme court in 1872 expressed this doctrine in the following words: “A railroad built by a state no one claims would be anything else than a public highway, justifying taxation for its construction and maintenance, though it could be no more open to public use than is a road built and owned by a corporation. Yet it is the purpose and the uses of a work which determine its character.” (n806 Alcott vs The Supervisors, 16 Wall., 678, 696)

P181
The granger movement was an attempt on the part of the people to secure control over railroad corporations and to prevent extortionate and discriminating rates by legislation, which according to the usually accepted understanding of the Dartmouth College decision, would be unconstitutional. The granger states were those whose legislatures enacted such laws and provided means for their enforcement. Cases involving the constitutional rights of state legislatures to regulate railroad rates soon came before the United States supreme court from three of the four granger states, namely, Iowa, Wisconsin, and Minnesota. (n809) The railroads contended that state laws fixing maximum rates, or authorizing railroad commissions to do so, were unconstitutional because they impaired the obligation of the charter contract, because they virtually deprived the corporations of property without due process of law, and, finally, because such laws were a regulation of inter-state commerce over which Congress had been given exclusive jurisdiction. (n810) The constitution of the state of Wisconsin reserved to the legislature the right to amend or repeal charters. (n811 Const. of Wis., Art 11, sec 1) The railroad corporations here argued that this reservation clause must be construed in connection with the fourteenth amendment of the federal constitution, for the right to a reasonable compensation for their services was not a franchise or privilege granted by the state, but an inherent right which could not be abridged or impaired by the state,—the question of reasonableness was not for legislative but for judicial determination. (n812)

The supreme court however followed the decision it had just rendered in the case of Munn vs. Illinois. (n813) In this case it had held constitutional an Illinois statute which fixed the maximum charges for the storage of grain in warehouses at Chicago and other places in the state having not less than one hundred thousand inhabitants. The court asserted that, under the powers inherent in every sovereignty, a government may regulate the conduct of its citizens toward each other, and, when necessary for the public good, the manner in which each shall use his property; when the owner of property devotes it to a use in which the public has an interest, he in effect grants to the public an interest in such use, and must, to the extent of such interest, submit to be controlled by the public for the common good as long as he maintains the use; of the propriety of legislative interference within the scope of legislative power, the legislature is the exclusive judge. (n814 Munn v. Illinois, 94 U.S. 113 (1876))

I have already pointed to one the principles of republican political economy we may adduce, which is that property rights are subject to regulation in the interest of the general welfare - the public interest. Saby's quote of Kent reflects another principle: the rights of the people are natural, and exist before and
independent of the government, but the rights of corporations are
derived from the government. It is a gross mistake to not distinguish between people and corporations, as the Supreme Court notoriously did in Citizens United v. FEC.

Finally, in view of this history, it should be easy to see that the push to protect the profits of multi-national corporations from the regulations of national governments, as is contained in the Trans-Pacific Partnership and other “free trade” agreements, is a gross violation of the long-standing legal understanding of corporations’ relationship and responsibility to the community in which they operate. These trade agreements establish extrajudicial tribunals to adjudicate "investor-state disputes" in which corporations can sue governments for "lost profits" caused by the regulations of those governments. It should be obvious that the very idea of "investor-state dispute settlement" is an abomination to the principles of a republic, as articulated in Munn v. Illinois.

Try a Google search for "investor-state dispute settlement Munn v. Illinois" and you will see that nothing pertinent comes up. It is amazing that today's critics and opponents of the TPP and other “free trade” agreements have not applied the lessons of history to these latest attempts by corporations to escape their public duty. Proving, once again, that those who forget history are doomed to repeat it.

1 comment:

I've heard of a book by Gabriel Kolko (http://www.amazon.com/Railroads-Regulation-1877-1916-Gabriel-Kolko/dp/0393005313/ref=sr_1_1?s=books&ie=UTF8&qid=1427039948&sr=1-1&keywords=Railroads+and+Regulation%2C+1877-1916) that purports that railroad regulations were actually embraced by the rail companies as a means of quashing competition and guaranteeing profits, though this was only after the initial period of popular protest that you outline above. I haven't read the book and confess that I know little about the era and issue aside from what you've written here, but do you have an opinion on Kolko's argument? It would be great to get your informed thoughts.